If you walk into the average bank branch and ask to discuss their range of accounts, you may find yourself bombarded with a host of options. Checking vs. savings accounts. Money market accounts vs. savings accounts. Certificate of deposits vs. brokerage accounts. The list goes on. And of course each option offers all sorts unique financial benefits. This deluge of information can feel so overwhelming that you may find yourself opening an account that doesn’t serve your financial goals. 

We’re here to help! The remedy to this problem, as with most problems, is to educate yourself beforehand so that you’re better informed. To do that, you need to learn about the different types of accounts you may get offered, what they are and what they entail. For many, the choice boils down to a checking vs. savings account. So this article takes a look at what each type of account is and the key differences between them.

What is a Checking Account?

A checking account is a form of deposit account that allows you to make cash deposits and withdraw cash at any time. They’re one of the most liquid types of bank accounts available as they offer you the ability to access your money via checks, ATMs, debit cards, and many other means. There’s generally no restrictions on how frequently you can access your money stored in a checking account. Checking accounts might also be offered under a different name depending on the bank. Almost all of the largest banks in the United States will offer checking accounts.

For example, some institutions refer to them as “current accounts” or “demand accounts”. Simply put, a checking account is likely where a good portion of your money will go. It’s also the most transactional bank account you have. This is because your checking account is the account through which you make most of your payments and withdrawals.

What is a Savings Account?

While Checking accounts are mainly transactional, savings accounts are designed for holding money over long periods. As the name would suggest, the intention is for account holders to use the account for their saving efforts. We provided an overview of how banks made money that you can checkout here. But one point we made was that banks have to provide an incentive to depositors like yourself for keeping your money for long periods with them. As such, most savings accounts have interest rates attached and so the account holder’s money should increase as the interest is earned over time.

Similar to checking accounts, savings accounts allow you to make deposits. Some will also allow you to make withdraws but there are limitations around this. It could be that you are restricted in how many withdrawals you can make per month or a minimum account balance that must be maintained. Before diving into the differences, one final similarity stems from deposit insurance. The FDIC deposit insurance coverage limits covers both checking and savings accounts.

Checking vs. Savings Account – 5 Key Differences

Now that you have a good idea of what each of these accounts consists of, we can dive into the biggest differences. We touched on a minor difference already in terms of what people tend to use the two types of accounts for. However, there are several other differences to keep in mind.

1. Withdrawal and Deposit Limits

As you think about a checking vs. savings account, this should be one of the main points of consideration. You will typically find that a checking account has no limits on the amount of money you can withdraw nor any restrictions on the frequency. As long as you’re not attempting to withdraw more money than is in the account, you won’t face limitations.

By contrast, savings accounts tend to come with several limitations related to deposits and withdrawals. For example, they may limit withdrawals as a way to ensure you’re using your savings account for its intended purpose. This also allows the bank to have some stability in its deposit base.

2. Checking Accounts Don’t Pay Interest vs. a Savings Account Which Does

Savings accounts will generally pay interest on the balances you have deposited in the accounts. So for example, if you have $10,000 in a savings account, it could pay 1.0% per year. This means that if you maintained an average balance of $10,000 in the account you would have made $100 in interest at the end of the year. These rates are incentives for the account holder to maintain balances in the account. The more money you save, the more money you’re able to make through interest. On the contrary, it is rare to have an interest rate attached to a checking account. As these types of accounts are so transactional with money flowing in and out each week, they are rarely used for the purposes of saving. As such, banks are unlikely to pay any interest on the funds stored in them as these are not sticky deposits.

3. Each Have Different Fee Structures

Both accounts actually have fees attached to them. What differs is the type of fees you may have to pay for each type of account. With a checking account, you’ll likely find that the fees you pay are related to withdrawing more money than is available to you or using another bank’s ATMs. However, for savings accounts, you may end up paying fees if you fail to maintain a minimum balance or if you exceed withdrawal limit frequency. In both cases, it’s important to check the terms and conditions of the account contract before signing up. You may find yourself paying fees if you don’t.

4. Checking Accounts Have Overdraft Facilities vs. a Savings Account Which Doesn’t

An overdraft facility is essentially a sum of money that the bank agrees you can withdraw from your account over and above the money that is currently in that account. Unfortunately, savings accounts generally don’t allow overdraft facilities, likely because very few withdrawals from these accounts take place and also because these accounts have minimum balance requirements. On the contrary, Checking accounts do allow for overdraft facilities. However, you will typically need to arrange such a facility with your bank as they rarely come as standard for an account.

5. Different Purposes

Checking accounts tend to be the accounts people use to store the money that they intend to spend for daily or weekly transactions. Many people choose to get paid directly into their checking accounts so they have easy access to their money whenever they need it. The purpose of a savings account is almost the exact opposite. These accounts exist for you to save money over time, ideally with the goal of generating interest as well. Checking accounts by their nature are volatile while savings accounts are stable.

Final Word: Checking vs. Savings Account – Which Should You Choose?

The answer is that you should consider having both types of accounts. They serve different purposes and have value. Your checking account should be your default. You’ll use it to store a good portion of your money and it will be the account that you use to handle almost all of your transactions. Your savings account should be the focal point for your savings goals. This is where you contribute funds that you intend to not touch for a long time, As it is important to spend wisely, its just as important to save prudently and so have a checking and a savings account is a good idea.